Why are E-Commerce China Dangdang’s shares on fire?

Something magical seems to be happening to DangDang’s shares in 2012. Over the past month, the stock has shot up 98 percent. What gives?

There’s one stock in particular that drubbed my portfolio last year, and it happens to be E-Commerce China DangDang (NYSE:DANG). Fanfare was high when DangDang made its initial public offering in December 2010. That early love affair with “China’s Amazon” wore off quickly, though, and investors dumped shares like crewmen bailing water in a leaky boat.

DangDang shed more than 80 percent of it’s value in 2011 as shares free-fell from $30 to $4 a pop. I cringed every time I checked my 401K. But something magical seems to be happening for shares in 2012. Over the past month, DangDang has shot up 98 percent. What gives?

Here’s my assessment of why DangDang shares are recovering:

1) More users, more cashflow. DangDang used money from its IPO to expand its offerings and bolster the company’s distribution system. That’s helped drive up the number of orders at the site by 32 percent over the past year (per Fool.com). The site’s also driven up its total number of users to 5.5 million, up 36% over last year.

2) Renewed interest in Chinese stocks. With the Federal Reserve’s recent announcement that it plans to keep interest rates near zero until at least 2014, investors’ risk appetite has grown quickly. That’s pushed up a lot of Chinese stocks – and DangDang’s going along for the ride. Other winners include social networking company Renren Inc. (NYSE:RENN), up 60 percent since the start of the year, and video-streaming company Youku Inc. (Public, NYSE:YOKU), up 45 percent.

3) Robust EPS growth. According to CNAnalyst, DangDang’s long-term annual EPS growth should hit 53.3 percent. That puts it ahead of just about every top small-cap stock on the market besides Indian travel company MakeMyTrip Limited (NASDAQ:MMYT).

4) A new e-book platform. DangDang launched its e-book platform in December for use on iPhones, iPads and PCs. 50,000 book titles are available and each sale should net the company 20 percent of the sale price. Writer Kevin Chen expects DangDang’s ebook sales to start manifesting themselves in the company’s earnings reports in Q2 2012.

There are warning signs, though. For one thing, DangDang’s already blown through a lot of price targets for the company. Brokerage analysts have set an average target price of $8.01 (per CNAnalyst). DangDang’s competition could IPO soon, too (see our 2012 tech IPO calendar for more).

Despite the challenges the company faces, and the fact that it controls just 2.3 percent of the of B2C ecommerce market in China, investors seem to have warmed back up to DangDang. Shares still haven’t hit my dollar-cost-averaged price, but it’s a step in the right direction.

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